5/01/2008 @ 10:20PM

China's New Frontier

Textile companies once fled New England for the South. The same sort of thing is happening in China, and for the same reasons.

Almost 100 miles from a small airport in one direction and more than 200 miles from the nearest seaport in the other, Longnan County in China’s landlocked Jiangxi Province would seem an odd place to build a factory. But on what was farmland a decade ago, one of the world’s largest bra makers has more than 3,000 workers producing a quarter of its global production.

Exporters in southern China’s Pearl River Delta are grappling with higher labor and land costs and often looking to India, Vietnam and other frontiers. But for its next expansion later this year, Hong Kong’s Top Form International will likely push even deeper into China. Its success in Longnan shows why others may be wise to follow suit. “Manufacturers have to keep looking further inland,” says Michael J. Austin, Top Form’s chief financial officer. “We’ve got to go where there’s an abundant supply of labor at a reasonable price.”

The received wisdom about China’s rising wages, tightening labor regulations and appreciating currency has been that factories should flee to cheaper countries. But that sort of thinking discounted China’s massive investment in infrastructure over the past decade, notably in expressways that today link more of China’s impoverished interior to its eastern and southern ports in less than a day by truck. Now companies are scouting for inland sites–where costs are much lower and exporters can stay competitive–as thousands of coastal factories close, move or decide to expand elsewhere. The Asian Footwear Association, in a survey cited in Chinese media outlets, says half of the shoe factories that are leaving Guangdong are moving to less developed provinces such as Jiangxi, Guangxi and Hunan.

It took some imagination and guts to bet on Longnan County (pop. 300,000) in 1999, when Top Form became the first big foreign manufacturer to locate there. The labor pool consisted of farmers and the relatives left behind by migrant workers who sent home remittances from Guangdong Province to the south. The electric grid was so unreliable that it was sometimes even hard to get hot water, and the route to ports in Shenzhen and Hong Kong took nine bumpy hours on a two-lane road where farmers dried rice on the shoulder and signs warned, “Beware of Bandits.” Top Form executives arrived undaunted, and government officials were only too eager to welcome them. “When you start up here, you get tax breaks and land breaks,” Austin says. “They lower your entry costs and smooth the way.”

What has happened since is another iteration of the rice-hamlet-turned-factory-town story that has remade southern China. Top Form has anchored the transformation of a backwater, previously best known as a rural staging area for Mao’s Red Army, into an industrial center with 50,000 factory workers. The county’s gross domestic product has nearly quadrupled since 2000, to an estimated $518 million last year. One lure to move inland: Chinese consumers are buying a larger part of what China produces. “Ten years ago it was 100% manufacturing for overseas,” says Harley Seyedin, president of the American Chamber of Commerce in South China. Today more than half of American companies surveyed in southern China say they are focused on providing services and goods to the Chinese market.

Longnan is a new model of a Chinese boomtown. It does not have Shenzhen’s legions of ambitious opportunists and dreamers remaking it into a city of glass and steel. There are no roiling masses of migrant workers crammed into shoddily built factory dormitories. The county seat is still a town traversed more by foot, bicycle and motorbike than by car, with convenience shops, modest restaurants and one new quasi-upmarket hotel that’s nearly devoid of guests. The most exciting thing that happens here may be the annual Chinese New Year fireworks show, hosted by Top Form, which this year drew 60,000 onlookers. On a recent visit by FORBES, a farmer was nudging a water buffalo along the median of the town’s main road.

At the beginning of the day workers stream into the town’s industrial parks, sometimes in company shuttle buses that arrive from distant villages. At the end of their shifts they do something factory hands in Guangdong and other coastal provinces almost never have the luxury of doing–they go home to their families.

Lai Lianying is a typical case. The 34-year-old mother of two boys had moved to Guangzhou in 2001 to work in a garment factory because her husband was a migrant worker there. By moving back in the past few years to take factory jobs in Longnan, the couple has reversed the sad pattern of atomizing the family to seek a better life. Now stitching together bras on one of the sprawling sewing floors at Top Form’s Longnan plant, Lai earns a little more than $100 a month on a piecework basis. That’s 20% to 30% less than what she made in Guangzhou, but her verdict: “It’s better here. It’s home.”

Top Form has two similarly sized Pearl River Delta factories, in Nanhai and Shenzhen, and Austin says the average cost per worker in Nanhai is now $280 a month–almost twice as high as in Longnan. The lower wages in Longnan mean that employer-paid taxes and benefits based on wages are also lower.

Power supply, once one of the worst headaches of doing business in Longnan, has instead become a big selling point, he says. Guangdong factories can suffer from forced brownouts as often as two days a week in the hottest summer months, as the demand for air conditioning in crowded coastal cities overwhelms the grid. Longnan has worked hard to keep its new factory district humming, particularly for its anchor customer, Top Form. Indeed, when last winter’s heavy snowstorms knocked out power in much of the region, Top Form’s factory was the only one in the area to keep operating without a full day’s interruption, Austin says. He is not sure how that was possible but adds: “If you get in early, the gratitude for accelerating economic development for the area is [enormous].”

In fact, county and provincial officials in China are rewarded for boosting economic growth. In the interior they are all too ready to give away the store to foreign investors–especially land, and often with little compensation for farmers, a sensitive point in a country where property disputes are common and fertile farmland is scarce. Austin says Top Form has paid a “reasonable rent” for its land from the outset, though he’s not authorized to disclose how much that is.

With steady electricity, a customs house that can seal containers before they’re loaded onto trucks and an expressway to the coast, Longnan helps Top Form get more than ten containers to port every week–or 12.7 million bras last year, 25% of the 51 million bras the company produced and sold. Some 80% to 90% of the bras made at Longnan are destined for the U.S. and end up being sold under labels such as VF Intimates, Maidenform and Warnaco.

The expressway network is good enough that Top Form is ready to expand again, farther inland. It has inspected a site in southeastern Hunan Province that’s less than an eight-hour drive to Shenzhen or Hong Kong. It is also considering sites in Anhui Province, which is farther north but within a day’s drive of Shanghai and other eastern ports. In some of these locations Top Form would be the first big foreign manufacturer. Says Austin: “Manufacturing needs to do something very dramatic [to stay competitive in China], and being dramatic does mean starting something new.”